Board members are always looking out for the well-being of the company. Being successful industry veterans, these individuals are aware of the challenges faced by the board of directors and potential pitfalls on the road to organizational success.
What Are the Characteristics of an Effective Board of Directors?
To overcome the challenges faced by the board of directors, the group must come together as an effective governing body. The effectiveness of a board of directors is directly related to the level of commitment brought by each member to address board issues. Sitting on a board requires the members to champion and support the organization outside of the regular board meetings. Each board member is tasked with influencing the direction of the organization. To do so, they bring passion to the role.
Effective boards are not overly influenced by any one member. They must work as a team that allows time for healthy debate and mutual respect. In meetings, the board members must be direct without being disrespectful, courageous without being arrogant, and they must always be mindful that they represent all stakeholders from the most junior employees to senior management. To understand the organization, the board should also be aware of the organization’s culture. More than ever, boards are realizing how culture can make or break the organization. Losing track of the culture can lead to unexpected behavior that damages reputation beyond repair.
What Are the Roles and Responsibilities of the Board of Directors?
The main challenges faced by the board of directors include assuming several key roles and responsibilities that impact the entire organization. First, the board directs and manages specific leadership challenges with the organization. The board is responsible for hiring and evaluating the CEO. They also set the compensation amount for this role. Since the CEO’s salary and compensation package is often public, setting the amount too high or too low can damage the organization’s reputation. The board sets the organization’s vision, mission, and objectives. From a top-down view, this role impacts the direction in which the employees move and influences the culture. The board also has responsibility for managing the organization’s financial health.
The next challenges faced by the board of directors include governance responsibilities. These include establishing the system of governance through policies. Some policies are specific to the board’s role in the organization and with the CEO. Other policies are to govern the organization. With governance comes the control and monitoring responsibility. The board members hire an external audit firm that will perform financial and other annual audit work. The board also monitors the internal audit activity.
Challenges Faced by the Board of Directors Today
We often hear news of CEOs resigning due to financial or operational irregularities (aka Volkswagen’s former CEO Martin Winterkorn’s resignation due to the emissions scandal), but we don’t hear much about the leadership challenges considered by the board before making such critical decisions. In those classically designed, mahogany-furnished board rooms, there are some considerations that hold far more bearing on decisions than others. In this article, we will explore some of these important concerns.
1. Cybersecurity Breaches
Customers provide a lot of sensitive information to organizations, placing trust in the data storage systems. Additionally, every organization has critical internal data that gives them a competitive advantage in the market. If data such as credit card details, social security numbers, unpublished financials, etc. is leaked to external sources it could have disastrous consequences. The FBI now ranks cybercrime as one of its top law enforcement activities. Moreover, recent history has shown us that even large companies are not fully safeguarded from the threat of cybercrimes.
2. Regulatory Compliance Risk
In its annual Cost of Compliance survey, Reuters revealed that regulatory fatigue, resource challenges, and personal liability are expected to increase. These findings are a reflection of the sheer volume of regulatory change that continues to be anticipated, as firms navigate both international and domestic rules which have a global impact with resulting overlaps. The board members have good reasons to be concerned about regulatory compliance because of increasing global operations and the ever-changing regulatory landscape.
3. Reputational Risk
Warren Buffett said “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” According to a 2012 study by World Economics, on average, approximately 25 percent of a company’s market value is directly attributable to its reputation. This reputational risk is high on the list of board issues. Not surprisingly, when Forbes Insights found that 90 percent of executives believe reputation risk is their key business challenge.
4. Crisis Management
A crisis is an event that leads to an unstable and dangerous situation for the organization. Irrespective of whether you accept or deny the situation publicly, as a board or management, you definitely cannot ignore a crisis. Many large organizations such as G.M. and Penn State have realized the negative effects of acting slowly in a crisis and being in a constant state of denial. In this well-written article in Forbes about the Role of Boards in crisis, the author gives ten-point advice on how to handle crisis situations.
5. Corporate Governance Risks in Subsidiaries
Through the Enron scandal, one of the best-known challenges to corporate governance, the whole world saw how a lack of appropriate compliance checks in subsidiaries can spell doom for a giant company and a highly reputed audit firm. Corporate governance issues today include robust corporate governance practices and policies to subsidiaries. Subsidiaries’ activities can directly impact the reputation of the parent company, which does not have as much visibility into the subsidiaries’ activities as it would like.
Mitigation: A strong risk management process that allows management to continuously identify, assess, and manage risks addresses challenges faced by the board of directors. In many organizations, dynamic risk management software is an efficient tool to identify and nullify different types of irregularities before these cause long-term damage — get started with RiskOversight today!
Daniel Kim, CPA, is co-founder of AuditBoard. Formerly global head of audit for two multibillion-dollar public companies, Daniel leverages his 15+ years of audit, risk, compliance, and SOX program consulting with hundreds of pre-IPO and public companies to deliver modern solutions for today’s corporate audit needs.